Table of Contents
• Describe Financial Statement Analysis
• The scope of analysis
• Purpose of Paper
• Description of business
• What company is working on and their are products
• Identify the method used to identify and locate sources • Explain the rationale used for selecting the sources to analyze • Explain the analytical technique be used for analyzing the sources • Identify the criteria for evaluating the information found
IV. Analysis and Discussion
• Present 5 years of statements – Ratio – Trend Analysis – See if ratios are improving • Discuss scores
• Discuss financial performance of company
• Comparative analysis with industry and/or products
• Identify findings
• Answer research question
VI. Works Cited
Financial analysis is used to assess the financial stability of a company. Creditors are interested in the short-term liquidity of a company and whether the company can repay its debts on time. So creditors use financial statements to determine whether a company is creditworthy. Stockholders are interested with future earning and dividend payouts and use the financial statements to determine whether a company is worth investing in. Creditors and stockholders seek prior and current financial information on prospective companies before entering a business relationship with them. The information obtained from financial statements will give a quick snapshot of whether the company is financially stable.
The financial statement is a written report which quantitatively describes the financial health of a company. This includes a balance sheet and income statement. The Balance Sheet is a quantitative summary of a company's financial condition at a specific point in time. It contains the company’s assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing the company owes. The income statement is an accounting of sales, expenses and net earnings for a given period. Each statement has a different function. Creditors look at the balance sheet while investors look at the income statement. In its own way each will provide a measure of a company's financial health. Financial statements are usually compiled on a quarterly and annual basis.
Financial statements are widely standardized and the relationship between certain data in the financial statements can be used to assess areas where a company excels or areas that need improvement. One analytical technique is ratio analysis. There are two types of ratio analysis that can be used depending on the ratio category: Cross-sectional and time-series. Cross-sectional analysis compares a firm’s ratio with a competitor’s ratio or the industry average over the same period of time. Time-series analysis compares a firm’s performance over time, comparing current data to historic data. Combining the two approaches would be the most informative because there is a view of a trend in the performance of a ratio and in relation to the trend for the industry. However, it is important to note that ratio analysis should be used as an initial step in determining the financial performance of a company because, “its effectiveness is limited by the distortions which arise in financial statements due to such things as historical cost accounting and inflation. Therefore, ratio analysis should only be used as a first step in financial analysis, to obtain a quick indication of a firm’s performance and to identify areas which need to be investigated further.”
Ratio analysis consists of four basic categories: Liquidity, activity, debt and profitability ratios. Liquidity, activity and debt ratios primarily measure how risky a...